China’s yuan eventually could develop into a reputable global reserve currency
“The use of Chinese currency will inevitably expand and play a much bigger role in the world,” Baizhu Chen, professor of clinical finance and business economics at the University of Southern California, told Insider. “Some countries feel their economies could be held hostage to US policies because the dollar is dominant, and countries want to diversify their risk.”
Already, upwards of 70 central banks hold some yuan as a reserve currency, while many African countries and some in the Middle East regularly use it for transactions, he noted.
Meanwhile, other central banks have diversified their holdings over the last 20 years, reducing the dollar’s share of global reserves, the International Monetary Fund said in a report Thursday.
And in recent weeks, more efforts to pull back from the dollar have emerged. Saudi Arabia and China are looking to use yuan in a new oil deal. Russia and India are in talks to revive a ruble-rupee ledger. Moscow has also demanded Europe use rubles to pay for its natural gas and may even turn to bitcoin for payment.
“Were the dollar to lose its status as the world’s reserve currency, it would raise interest rates for our historically large debt relative to the economy,” warned Tomas Philipson, former Acting Chairman for the White House Council of Economic Advisers.
China’s yuan is replacing the dollar and euro in Russian bank accounts
Russian banks are reportedly seeing sharp increases in the Chinese yuan in their clients’ accounts as Western sanctions limit access to the dollar and euro.
According to a March survey conducted by Russian financial daily Kommersant, large banks have seen a spike in funds being converted from dollars and euros into yuan. New accounts are also being opened with yuan.
In Tinkoff Bank, the volume of account funds in yuan has gone up eight fold. MTS Bank saw a four-fold jump, and the Bank Saint Petersburg’s increased by 3.5 times.
“Under the conditions of restrictions, many companies see settlements in yuan as more stable and predictable,” MTS Bank told Kommersant. Another Russian bank noted that many companies involved in wholesale trade are switching to settlements in yuan.
The shift comes as Western countries continue to impose severe financial sanctions on Russia for its war on Ukraine, including limitations on foreign currency use. But since China has not participated in the wartime sanctions, access to the yuan remains open, making it a potential currency alternative.
Russian finance consultant Yugar Aliyev told the Kommersant that a sea change is underway. In the medium term, he said, the yuan “will not only replace the dollar in settlements with China, but also become a more reliable means of international settlements for Russian companies.”
But while transactions with the Chinese currency have grown, the dollar and euro remain dominant worldwide.
The US dollar’s global standing as the top reserve currency has lost ground to China’s yuan and others, says IMF
The dollar share of international reserves has been in decline over the past two decades as central banks look to diversify their holdings into the Chinese yuan and other currencies, according to a new report by the International Monetary Fund.
The dent in the dollar’s dominance, though, is not a consequence of fluctuations in exchange rates or interest rates, but instead it can be chalked up to the moves of other nations’ central banks.
The IMF noted that the dollar has been steadily offset as reserve managers primarily move into two alternative directions, with a quarter turning to the yuan and three-quarters exploring non-traditional currencies from nations that typically play limited roles as reserve assets.
“A characterization of the evolution of the international reserve system in the last 20 years is thus as ongoing movement away from the dollar, a recent if still modest rise in the role of the renminbi, and changes in market liquidity , relative returns and reserve management enhancing the attractions of nontraditional reserve currencies,” the IMF report said.
China has pushed for greater yuan adoption across Africa, and its recent talks with Saudi Arabia for a yuan-based oil deal have signaled that nations are at least thinking about some alternative or counterweight to the US dollar, economist Aleksandar Tomic previously told Insider.
“While any deal would be symbolic, the Chinese are not alone in the search for a non-dollar reserve currency,” Tomic said. “Other countries’ need for dollars exposes them to the US financial sector, and consequently gives the US political leverage.”
For China to continue pushing the yuan to take on a greater share of the global reserve currency, Tomic said it would have to prove the yuan’s long-term stability to win the trust of other nations.